Only the initial currency reaction to the EU/IMF bank and debt rescue plan was as ecstatic for the euro as it was for the equities. The united currency closed on Friday in New York at 1.2733. The euro opened at 1.2820-70 in Sydney on Monday and shot to 1.3092 in London . However, by 4:00 pm in NY it had fallen back to 1.2790. The retreat continued in Asia and then Europe on Tuesday where it touched 1.2665 well below the Friday’s New York close.
Very different were the equity responses around the world on Monday. In New York , the Dow closed up 3.9%, the NASDAQ 4.81%. In Europe the FTSE gained 5.16%, the DAX 5.3% and the CAC 40 9.66%. Asia was modest by comparison, the Nikkei rose 1.6%, the Hang Seng 2.54% and Shanghai composite only 0.39%. By any standards, the relief rally was historic.
The currency doubts stem from the ECB agreement to purchase distressed sovereign debt. This is direct monetization of deficits and debt. In principle it is no different from the US Federal Reserve program announced last March 18th that precipitated the biggest fall in the dollar against the euro in a decade. The EU
and the ECB may promise sterilization but the markets will trade on intent and the intentions of the EU, the European governments and their instructions to the ECB are clear. Inflation is once again a legitimate tool of fiscal policy.
The politicization of the ECB was inevitable and a foregone conclusion from the beginning of the Greek crisis. This is how I phrased it in my January 19th and February 8th Market Directions columns.
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